Audit questions FHA's ability to screen lenders

WASHINGTON 
The government's mortgage insurance agency is doing a poor job of screening lenders that enter the program, an internal audit has found.

The audit was completed last month by the Department of Housing and Urban Development's inspector general. It concluded that the Federal Housing Administration had insufficient controls to make sure lenders meet the agency's standards.

About 20 percent of new loans today are backed by the FHA, up from as low as 2 percent during the subprime loan boom. The FHA does not make loans directly, but insures loans from outside lenders.

The agency approved nearly 3,300 lender applications in fiscal 2008, more than triple the year before. But the number of workers evaluating applications remained the same. In a review of 22 approved applications, the audit found that only one contained all the necessary documents.

The agency's ability to manage its participating lenders is a big concern because there are growing fears that the agency will need a taxpayer bailout. Last month the FHA said its financial reserves had sunk below mandatory levels for the first time in its 75-year history.

In its official response to the report, HUD official Joy Hadley wrote that the agency "remains committed to ensuring that only responsible, financially sound lenders with integrity become approved as FHA program participants,"

Last month the FHA said it will raise the financial requirements for lenders and request annual audits, and officials have been cracking down on lenders suspected of fraud.